An Iraqi flag once again flies outside the old presidential palace of Saddam Hussein after the United States returned the building, one of the most powerful symbols of the US-led occupation, to the Iraqi Government today.

Iraqi soldiers also stood guard in greater numbers at checkpoints across Baghdad’s green zone as control of security inside the fortified compound was handed to the Iraqi authorities, although US troops will maintain a presence.

Marveling at the transition, Nouri al-Maliki, the Prime Minister, proposed a national holiday on the first day of the year to mark the moment the country “regained its sovereignty” almost six years after the invasion.

“This palace is the symbol of Iraqi sovereignty and by restoring it, a real message is directed to all Iraqi people that Iraqi sovereignty has returned to its natural status,” he said at a flag-raising ceremony at the marble-floored mansion.

“We have the right to be proud and to be happy and to hold celebrations these days, especially on this day.”

The pomp followed a mad dash by US officials to empty the palace of their equipment, such as computers, documents and furniture. It had been thought that they would have an extra few weeks to clear the decks but the Iraqi Government insisted on the handover taking place on January 1.

As a result, the US flag was lowered on New Year’s Eve, drawing to a close the palace’s de facto role of serving as the US Embassy and a hub for US, British, Australian and other coalition forces.

The move was agreed under the terms of a new security agreement between the United States and Iraq, which came into force on New Year’s Day. It puts all 145,700 US troops in Iraq under the authority of the Iraqi Government for the first time, replacing a UN Security Council resolution that expired at the end of 2008.

US diplomats now live in a new Embassy compound, the largest of its kind in the world, but the future of the vacated palace remains unclear, with the Prime Minister and Jalal Talabani, the Iraqi President, both eyeing it.

Sherwan al-Waili, Minister of State for National Security, declined to say who would move in. “This is an Iraqi problem, simple problem,” he told reporters after a separate ceremony to mark the transfer of security in the green zone from US to Iraqi control.

The sound of Iraqi bagpipes as well as young children reading poetry and performing songs were among the highlights of this relatively low key event on a stretch of blast-wall-lined road near a main exit gate to the compound.

Several US and Iraqi dignitaries sat under a makeshift, tarpaulin shelter, decorated with balloons and tinsel, listening to speeches and watching as a bagpipe band marched past dressed in bright, red uniforms. A brass band also joined in, trumpeting old British marching tunes, a typical trapping of any Iraqi military parade.

“It feels good that responsibility for the green zone will be handed over to the Iraqi side,” said First Lieutenant Ala Abdul Hussein, the bagpipe band conductor.

Driving around the streets, however, nothing looked immediately different other than a heavier presence of Iraqi troops at checkpoints.

Plans are afoot to collapse some of the concrete walls that ring the green zone, which houses Iraqi Government buildings and embassies, including Britain’s. The Iraqi authorities also want to open up a number of roads to enable the public once again to access what has been a tightly-secured compound since 2003.

US troops will work with their Iraqi counterparts in a support-role at checkpoints for another three months, according to Colonel Steven Ferrari, who commands US forces in the area.

A joint Iraqi-US committee will then evaluate the situation “to make sure that everyone feels confident that they are ready and when they tell us to leave we will leave”, he said. In a sign of things to come, hundreds of US soldiers have already moved from the green zone to a US military base near Baghdad airport.

Outside the green zone there were further signs of Iraqi forces taking the lead, with a number of joint, US-Iraqi security stations in the capital transferring to full Iraqi control.

Further south in the Iraqi province of Basra, British forces handed Basra airport back to the Iraqi authorities. British and US troops will remain on a base next to the airport but occupy a smaller area.

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